FinalS06 - Econ 130 Final Exam This is Exam A Please write...

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1 Econ. 130 Final Exam June 14, 2006 This is Exam A. Please write an A on the cover of your blue book. Part I. True-False (30 points) Please state whether the following statements are true or false. Provide a brief explanation (one paragraph at the most). Include graphs as necessary. Make sure to label any and all graphs. Each question is worth 3 points. Exam A B C 1 3 8 The public sector (i.e., the government) must provide public goods itself; it is never efficient for private markets to provide public goods. False . Sometimes the service provided by public provided goods can be provided privately. Whether the good should be public or privately provided depends on several considerations. The less expensive sector is to be preferred, all else equal. Administrative costs can be spread over larger groups of people in the public sector, so larger communities may rely on public provision. If there is greater diversity in tastes, private provision can be more efficient. Commodity egalitarianism may require public provision to ensure all have equal access. 2 8 7 One rationale for social insurance programs like Social Security and Medicare is that adverse selection causes private markets to fail to provide adequate amounts of insurance. True. Due to imperfect information, insurers know less about the risk of the insured than the insured. An individual who is more likely to collect benefits is will have a higher demand for insurance. Low risk people drop out of the program, and premiums rise to cover shortfalls, which drives additional lower-risk people out. The public sector solves this problem by mandating participation in the program. 3 9 6 While corporate income taxes may be viewed as a form of double taxation, they are necessary to protect the integrity of the personal income tax. True. Some argue the corporate income tax is a form of double taxation, as profits are taxed at the corporate level and then again at the individual level when dividends are paid. Without corporate income taxes, companies will have incentives to hold profit as retained earnings. Shareholders would thus avoid paying taxes on the company’s profit. One reason for corporate income taxes is to eliminate this loophole. Reform proposals attempt to correct for this problem and eliminate double taxation.
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